Nearly one million more people will be paying the higher rate of income tax even if the Tories raise the 40p tax threshold to £50,000 by 2020, the Treasury has admitted.

The forecast from HM Revenue and Customs shows 4.6 million people currently paying income tax at the 40 per cent rate, which starts at £41,900 a year.

However, even if the threshold is raised to £50,000 a year, 5.5 million people will still be paying income tax at 40 per cent — 900,000 more than do at present. The Institute of Economic Affairs (IEA), which discovered the estimate, said that the UK’s income tax system was “not fit for purpose” and needed to be reformed.

The news came as the Institute of Directors (IoD) called for an overhaul of tax band thresholds in favour of a “triple lock” system, which would see them increase automatically every year.

David Cameron, the Prime Minister, was praised for helping middle-class families by pledging at the party’s annual conference that a Tory government will increase the 40p income tax threshold. Saying he wanted to restore “fairness to tax”, Mr Cameron said the 40p rate was “only supposed to be paid by the most well-off people” yet teachers and police officers were being “dragged into it”.

The IEA accepted that without Mr Cameron’s conference pledge, the number of people paying the higher rate would be 6.3 million by 2020. But it added that the Prime Minister’s pledge is “best thought as tempering a planned tax rise” rather than a cut for middle-income earners.

The IEA said the figures showed “the future for British taxpayers is bleak unless politicians agree to drastically reform the UK’s tax code”. Its report – Taxing Problem: The UK’s Incoherent Tax System – charted “a huge increase in the number of people paying higher tax rates over the last 25 years”. It said: “In 1990 around one in 15 income taxpayers paid the higher rate (1.7 million people). This had increased to about one in 10 by 2010 (3.3 million) but has since increased significantly to one in six income taxpayers (4.6 million) by 2013/14.”

Since 2010, the Coalition has allowed the higher rate threshold to fall from £43,875 in 2010 to £41,865 in nominal terms, pulling in millions of taxpayers. The IEA said: “Next year this threshold will only be increased by one per cent, meaning that more income taxpayers are likely to be dragged into paying the higher rates.” Recommending wide-ranging reform of the tax system, it suggested merging national insurance and income tax into a general tax on labour.

It said: “It is unacceptable to persist with a system that drags millions into paying a higher rate of income tax and erodes the aspirations of those on low pay to progress up the pay ladder.”

The call for action was backed by the IoD, which said the 40p threshold should rise each year by the higher of three measures: RPI inflation, average wage inflation or 2.5 per cent.

Simon Walker, the IoD’s director general, said: “The government’s penchant for increasing taxation by stealth through fiscal drag is nothing short of scandalous. These proposals go some way towards ending a process that has already trapped millions of middle earners into eye-watering levels of tax originally reserved for a small cohort of high earners.

“We must make it harder for politicians to sit back and let fiscal drag take care of the public finances.”